PG&E Turns In Another Steady Quarter

We plan to raise our fair value estimate for PG&E PCG modestly after the company turned in another solid quarter of financial results and is positioned well for constructive regulatory outcomes in 2022, in our view. We are maintaining our no-moat and stable moat trend ratings.

We continue to value PG&E at a significant discount to other regulated utilities because of the multiple risks it faces, including political, regulatory, and environmental. However, we think those risks are slowly shrinking and PG&E deserves less of a valuation discount to peers. We continue to believe PG&E has some of the best growth prospects among U.S. utilities, including 10% annual earnings growth based on a $9 billion annual capital investment budget.

PG&E reported $0.30 of core earnings per share in the first quarter, up from $0.23 in the first quarter of 2021 due to lower operating costs and rate base growth. Management reaffirmed its $1.07-$1.13 EPS guidance for 2022, in line with our estimate.

PG&E faces three key regulatory decisions during the next year that could affect its near-term growth rate. We expect a ruling on the 2022 and 2023 cost of capital proposals by the end of the year. We think it's unlikely that California regulators will approve PG&E's 11% allowed return on equity request for 2023, but we expect regulators to continue their practice of approving allowed ROE well above the industry average, which is near 9.4%. We also expect continual updates to the 2023 general rate case, which will determine PG&E's capital and operating cost budget through 2026.

PG&E remains on track to reinitiate a dividend in 2023. It also became eligible for inclusion in the S&P 500 index as soon as the next rebalancing June 17 after posting cumulative positive GAAP earnings for the last four quarters.